Successive Successes
Management succession becomes a central issue for ESOP companies. Kloke has paid ever-greater attention to his managers and new hires since establishing the ESOP, targeting those who can take on more responsibility as he, in turn, surrenders it.
Before becoming willing participants in management succession, however, employees must be in favor of the ESOP. Although an owner does not need to seek permission to hand over control, the employees wield de facto veto power. If they are not on board—perhaps because they fail to see the value in ownership or believe the company’s prospects are poor—the venture is destined for trouble. Bridging this gap may require restructuring the entire company to appeal to its new employee-owners.
The ESOP itself is a complex matter. An owner or ownership group must prepare an ESOP team consisting of the owners, the company’s CFO and corporate counsel, a lending institution, an outside ESOP specialist and often the owner’s attorney, accountant and/or financial advisor. At a minimum, expenses will run approximately $40,000, but are more likely to go beyond $100,000. Expect to pay between $25,000 and $50,000 for feasibility studies before an ESOP even gets off the ground. Companies must undertake a thorough valuation and pay fees to lawyers and an ESOP administrator. The ESOP entity cannot pay more than fair market value for the equity.
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